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Surplus funds to invest? Why you should look beyond the bank

27th November, 2019

For business owners, holding excess capital in the shape of cash or bank deposits has always been a nice problem to have. As the value of traditional monetary assets has fallen in recent years, generating a return on cash reserves has become a lot more challenging.

How has this come about? Look no further than the financial crisis of 2008, which created a low-interest, low-inflationary environment that has lingered on to the present day. As interest rates continue to plummet, many larger corporate clients today find themselves in the crazy situation of paying their bank just to hold their cash.

While Small and Medium Enterprises (SMEs) are not likely to be charged just for placing cash on deposit – not yet anyway! – they are even less likely to see any meaningful returns on deposits for the foreseeable future. Business owners therefore need to look at alternative ways of putting their hard-earned capital to work.

For SMEs, working capital has a variety of needs and uses. Paying the bills, of course, and serving as a vital safety net in case emergency reserves are ever required. Excess cash can also be held with a view to the longer term – Mergers & Acquisitions (M&A) expenditure, for example – while some owners may find themselves in the enviable position of having surplus funds for extraction.

Alternatives to bank/bonds

Whatever the purpose, the traditional methods of depositing capital in a bank account or investing in Government bonds are now less than enticing. So how can investors and business owners get more creative with their excess funds?

High-quality bonds were traditionally seen as a safe bet, an almost certain path to profit, but that is no longer set in stone. Today, Euro government bond yields have plummeted below 1% and, in some cases, now offer a negative yield, and any decrease in interest rates – which can hardly sink any lower – will see bondholders suffering a capital loss.

Equities are another option, and in recent history, they have had higher returns compared with bonds, property and many other asset classes. They are, however, at the mercy of the stock market – volatile to say the least – and while they may offer a decent return over the long term, there are also lengthy periods during which their value declines.

Then there are ‘alternative’ asset classes including the likes of private equity, property, hedge funds and commodities. Again, investors in these alternatives are required to play the long game, which may not always suit the shorter-term needs of SME owners.

Multi-asset investing

So, there is no single approach that offers an easy solution or safe bet. However, a strategy of multi-asset investing – known as the endowment model – may be a more rewarding way to go. This involves diversifying across traditional asset classes such as equities and bonds, while allocating significant portions of the portfolio to alternatives such as private equity, hedge funds and property.

Combining asset classes in this way has been shown to generate annual returns well above the traditional 60/40 stock/bond portfolio, but again there’s a catch – endowment models are expensive and time-consuming to set up, making them impractical for many corporate clients.

UCITS worth considering

A more realistic approach for SME owners may be to invest in low-cost funds that replicate the best features of the endowment model, i.e. diversification across a wide range of asset classes. In particular, UCITS (Undertakings for Collective Investment in Transferable Securities) funds are worth a look.

UCITS funds are highly liquid and can be redeemed quickly if and when the need arises. Many UCITS are also sold at a single price so there is no bid-offer spread. There are risks and considerations associated with this approach, but a degree of risk is, of course, inherent to all investments.

Questions at every turn, but perhaps the best way to start the ball rolling is to decide whether your surplus cash really is surplus. Once you’re sure you are in a position to invest, you can look at an investment strategy that suits your individual circumstances.

Start the conversation

You don’t have to go it alone. Here at Davy, our Investment Advisers specialise in helping business owners to meet the challenges of a complicated investment market. If you would like to have an exploratory conversation about making the most of your excess capital, we’d love to talk to you.

Subscribe to Insights for Business Owners

This article is taken from the latest issue of Insights for Business Owners, a twice-yearly email publication which provides business owners with expert analysis of the latest economic & investment topics affecting corporates, as well as special features and profiles of leading business owners.

Warning: Past performance is not a reliable guide to future performance. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment.

The information in this article does not purport to be financial advice and does not take into account the investment objectives, knowledge and experience or financial situation of any particular person. You should seek advice in the context of your own personal circumstances prior to making any financial or investment decision from your own adviser. There are risks associated with putting a financial life plan in place. There is no guarantee that by having a financial life plan in place, you will meet your objectives.

Subscribe to Insights for Business Owners

This article is taken from the latest issue of Insights for Business Owners, a twice-yearly email publication which provides business owners with expert analysis of the latest economic & investment topics affecting corporates, as well as special features and profiles of leading business owners.

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Established in 1926, the Davy Group is a trusted market leader in wealth management and capital markets, building rewarding relationships that last. We are over 700 people, managing €14bn+ of our client assets, with offices in Dublin, Belfast, Cork, Galway, and London. At Davy, it’s not just business, it’s personal.

J & E Davy, trading as Davy, Davy Private Clients, Davy Capital Markets, Davy Select, Davy Institutional Consulting, Davy Real Estate, Davy Research, and iCubed, is regulated by the Central Bank of Ireland. J & E Davy is a member of Euronext Dublin and the London Stock Exchange. In the UK, J & E Davy is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request. Davy Private Clients UK and Davy UK are the trading names of J & E Davy (UK) Limited. J & E Davy (UK) Limited is authorised and regulated by the Financial Conduct Authority. Davy Corporate Finance is regulated by the Central Bank of Ireland. In the UK, Davy Corporate Finance is authorised by the Central Bank of Ireland and authorised and subject to limited regulation by the Financial Conduct Authority. Details about the extent of our authorisation and regulation by the Financial Conduct Authority are available from us on request. Davy Global Fund Management Limited, trading as Davy Global Fund Management, is regulated by the Central Bank of Ireland. In the UK, Davy Global Fund Management is authorised by the Central Bank of Ireland and is subject to limited regulation by the Financial Conduct Authority (“FCA”). In Luxembourg, Davy Global Fund Management is authorised by the Central Bank of Ireland and is subject to limited regulation by the Commission de Surveillance du Secteur Financier (“CSSF”). Details about the extent of our authorisation and regulation by the FCA and CSSF are available from us upon request. Advance Fund Management Limited is regulated by the Central Bank of Ireland. Davy Fund Managers is regulated by the Central Bank of Ireland. Davy Securities is regulated by the Central Bank of Ireland. Davy Securities is a member of FINRA and SIPC.

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